Securing Your First Home Loan

If you’re thinking of buying your first home, don’t make the mistake of starting by spending your weekends in search of your dream home – that part of the journey will come soon enough! Instead, the first thing you need to do is to focus on securing your finances, or you’ll never be sure how much you can afford. And if you’re not a fan of paperwork, fear not! There are many people available to help, including your financial adviser or mortgage broker, solicitor, conveyancer and even professional real estate agents.

For first-timers, organising your finance can seem like an overwhelming process but if you take it one step at a time, you’ll have nothing to worry about. To help you start your journey, we’ve compiled a list of milestones you must reach in order to obtain your mortgage.

1. Save for your deposit

This first step is essential. It will help prove to yourself and to your lender that you have the financial capacity and discipline to meet your mortgage repayments. Typically, lenders are looking for at least 10 percent of your requested loan to be covered by a deposit. Ideally, you’ll have 20 per cent, or a lender may insist on you taking out lender’s mortgage insurance (LMI). This protects them from you defaulting on the loan but costs you tens of thousands of dollars over the lifetime of a loan.

Alternatively, you could seek a loan guarantee. Usually banks insist only parents provide this and lenders will offer up to 105 percent of a property’s value in these circumstances. Ask your financial adviser about this option.

2. Know your expenses

Lenders will focus on your earnings, length of employment, and monthly expenses for the 12-weeks leading up to the loan application. Carefully manage your outgoings and be honest with yourself. Pay off as much debt as possible and don’t swap jobs just before seeking a loan or while it is being considered – That could send you back to square one. Don’t hurt your cash flow by buying a car, as that will decrease the amount of money a lender will give you. And lastly, apply for your credit rating to show the lender when the time comes.

3. Understand what you can afford

Many banks and lenders have basic online calculators that’ll give you an idea of what you might be able to afford based on your income and outgoings. When using these calculators, don’t forget to exclude your current rent in the calculation! The answers from these calculators will give you a decent idea of what you can potentially afford. Their results will be influenced by the term of the loan and interest rate. Be aware, interest rates rise and fall, especially over the normal loan period of 25 or 30 years.

4. Talk to a lender

With a good idea of what you can afford, it’s time to approach a bank, lender, or mortgage broker to get an idea of the numbers and get a sense of the type and location of property that you can afford. all lenders will ask you to state your income, outgoings, debts and their repayments, assets and dependents. Mortgage brokers represent a number of lenders, including banks, and provide the widest range of options and can take a lot of the hard work out of it at this point.

5. Shop around

There are an array of products, interest rates and services to choose from. If you don’t opt to use a mortgage broker, then making sure you do your own research is essential. When you are ready to apply, make sure you have all your documents ready, such as pay slips, credit file, bank and credit card statements, electricity bills, and so on.

6. Decide on your loan

A number of options are available. Two of the basic choices are loans with a fixed or variable interest rate. A fixed rate locks you in to a set repayment schedule where you can lose out if rates go down but win when they go up. A variable rate means you’re playing the financial markets where your repayments will vary over the months and years as the interest rate ebbs and flows.

Another option is to take an interest-free period for perhaps five years, which gets you into the market even though it might be a financial stretch right now. Be sure to understand the ramifications of these loans down the track.

7. Pre-Approval Process

When a lender pre-approves your loan, which can take around six weeks, they’ll issue you with a pre-approval certificate or a home loan guarantee certificate. These mean you may bid or buy a property knowing the lender will support you up to the limit of the promised loan.

Conditions come with this. The lender may insist on lender’s mortgage insurance, which protects them from you defaulting. They’ll also request a valuation of your prospective purchase to ensure you haven’t paid too much. Pre-approvals usually last six months, so that’s the time when you can start spending your weekends out and about house hunting!